US: 2-Yr Note Auction

Tue May 26 12:00:00 CDT 2015

Actual

Previous

Total Amount

$26 B

$26 B

Coupon Rate

0.625%

0.500%

Bid/Cover

3.40

3.30

Yield Awarded

0.648%

0.540%

Highlights
Demand was respectable for the monthly 2-year note auction. Coverage was about average at 3.40 but up from 3.30 in April's auction. Dealers are sometimes heavy bidders for the 2-year note but less so today, taking down only a moderate 40 percent share of the $26 billion offering. The high yield of 0.648 percent was about as expected. In a technical note, the 0.625 percent coupon for today's issue matches an outstanding 5-year issue, making it an unscheduled reopening of the issue (CUSIP 912828SY7).

Definition
Treasury notes are sold at regularly scheduled public auctions. The competitive bids at these auctions determine the interest rate paid on each Treasury note issue. A group of securities dealers, known as primary dealers, are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold the bills, resell the bills to their clients or trade them with other securities firms. Typically, the New York Fed approves about 20 securities firms to be primary dealers but that number dropped sharply during the recent financial crisis as some were merged into other firms or went bankrupt. The Fed has been rebuilding that number regularly and the latest list can be found here. The 2-year notes are announced around the third week of the month (usually on Thursday) and then auctioned the following week. In all cases, the 2-year notes are issued (settled) on the last day of the month, unless it falls on a weekend or holiday, and then they are issued on the next business day. (Department of the Treasury)

Description
Individual investors can participate in Treasury auctions either through a securities dealer (brokerage firm) or via the Treasury Direct program, which saves on brokerage commissions. But brokers commissions are often nominal (especially with discount brokers), and using a broker does eliminate a lot of paper work and other administrative hassles. Brokers facilitate the purchases and sales of Treasuries in the secondary market, which is handy for buying Treasuries at times other than scheduled auctions or for maturities other than those offered by standard new issues.

Interest rates on Treasury securities are determined in the market; the Federal Reserve does not set them. However, bond investors are sensitive to Federal Reserve policy and thus market rates will mirror policy expectations. Usually, bond market players are forward-looking and this means that interest rates on Treasury securities will move in the direction of Fed policy with a lead. As a result, one is more likely to see rising interest rates on Treasury yields during an expansion (and falling yields during economic slowdowns) in advance of policy changes by the Federal Reserve.

Primer on TreasuriesTreasury securities, Treasuries, U.S. government bonds, T-bonds, T-notes, and T-bills all refer to the same type of security: debt obligations of the United States. Maturity refers to the length of the loan to the government. Treasury notes have maturities from 2 to 10 years (2-, 3-, 5-, 7- and 10-year notes are most common). Since 2008, the Treasury ruled that all securities it issues now have minimum denominations of $100 and must be purchased in increments of $100.

How notes workYou pay $1,000 for a note and receive interest payments every six months based on the coupon rate. If the rate is 6%, you get $30 every six months for a total of $60 per year. When the note matures in two years, you get back the original investment of $1,000, called the principal.

Investment ProfileTreasuries offer a measure of security unmatched by other investments - the U.S. government guarantees the initial investment (the principal) and interest payments. When Treasuries are resold in the secondary market, their prices are often significantly different than their face value since prices in the secondary market fluctuate based on the economic environment, inflation expectations, Federal Reserve policy, and simple forces of supply and demand. If a Treasury security is held to maturity, inflation and opportunity risks remain. Inflation erodes the value of both the principal and interest payments. Opportunity risk refers to what could have been earned had the money been invested elsewhere.

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